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The Dusk Network utilizes a sophisticated hybrid transaction model that incorporates a specialized Unspent Transaction Output (UTXO) system called Phoenix. Unlike traditional account-based models used by Ethereum, Dusk's UTXO implementation is specifically engineered for privacy and confidential asset ownership.
Key Features of the Dusk UTXO System
Encrypted "Notes": In the Phoenix model, funds are represented as encrypted notes rather than transparent account balances. Each note contains a specific quantity and set of spending criteria. When you send a transaction, you "consume" existing notes and produce new ones for the recipient, similar to spending physical cash.
Privacy via Zero-Knowledge (ZK): Dusk uses ZK proofs to hide the sender, recipient, and transaction amount. To an outside observer, the details of these notes are obscured, yet the network can still cryptographically verify that the transaction is valid and that no double-spending has occurred.
The Nullifier System: To prevent the same note from being spent twice without revealing which note was spent, Dusk uses nullifiers. These are deterministic values included in a transaction that invalidate the spent notes without allowing observers to link the nullifier back to the original note.
Merkle Tree of Notes: The network maintains the state of all created notes by storing their hashes in a Merkle tree of notes. When a new transaction is validated, the hashes of the resulting new notes are added to the leaves of this tree.
Coexistence with the Account Model
Dusk is unique because its UTXO system (Phoenix) coexists on the same ledger as an account-based model called Moonlight.
Dual-Rail Architecture: Users can switch between public (Moonlight) and private (Phoenix) transactions. This allows institutions to use the transparent account model for regulatory reporting while utilizing the UTXO model for confidential trading.
Atomic Conversion: The protocol provides a native bridge that allows for the atomic swapping of DUSK between the two models. Converting funds from Moonlight to Phoenix decreases the account balance and creates a corresponding private note at a stealth address.
This specialized UTXO framework is a core pillar of Dusk's goal to become a distributed Financial Market Infrastructure (dFMI) by balancing institutional transparency with individual privacy.